Reynolds American Inc. is nearing a deal to acquire Lorillard Inc. that, if successful, would transform the U.S. tobacco industry and put additional corporate muscle behind the already hot electronic-cigarette market.

The companies on Friday confirmed talks about a deal that would combine Reynolds' Camel and Pall Mall cigarettes with Lorillard's popular Newport menthol brand to create a more powerful No. 2 to U.S. industry leader...